A practical guide to budgeting for small businesses

 

Budgeting is one of the most important things you can do as a small business, and yet a surprising number of business owners overlook it, underestimating how vital it is. They spend time on sales, marketing and product development, yet don’t pay much attention to what’s happening behind the scenes in terms of the business’ finances.

A budget doesn’t just keep track of spending, it provides clarity, direction, stability, and it gives you the confidence to grow your business in a way that works. It helps you to get ready for the unknown, use your cash resources wisely and create a business that can weather changes in the economy, competition and any other problems that come up, without running into financial ruin.

What Happens When You Don’t Budget

As a small business, not making a budget isn’t a viable option, not if you want to achieve long-term, sustainable success in your industry. Without a budget, your business will immediately run into problems, with further issues slowly developing over time.

Lack of Cash

If you don’t plan your business’ spending ahead of time, you’re likely to find that the costs you incur and the expenses you have to pay surpass the cash you have on hand. Even though your sales might be strong, not having a budget makes it very easy for you to run into cash flow issues.

Unknowingly Spending Too Much

Small, regular costs often go unnoticed in business. When you have a lot of outgoings to keep on top of, small costs are easily overlooked, mixed up with bigger, more noticeable outgoings. Over time, these costs add up and make a big difference to how much money you have. Before you know it, you’ve spent too much.

Poor Pricing Decisions

If you don’t fully understand costs, including how much it costs you to provide a service or product, you might find yourself charging too little. Though this will bring in some money, it’s unlikely to lead to your business making any kind of real profit.

Debt Dependence

Business owners that don’t plan their finances often have to borrow money from elsewhere, or use credit to pay for everyday running costs. This puts long-term financial pressure on the business, especially if you don’t really have the funds to cover the cost of repayments, interest and late payment fees.

Missed Growth Opportunities

If your finances aren’t clear, you might not be able to invest in growth opportunities, simply because you didn’t plan ahead and set aside the money you needed, or because you’re not sure if it’s an opportunity you can realistically afford to take at the moment.

Unable to Deal with Emergencies

Unexpected costs can stop business operations in an emergency, or force you to make less than ideal business decisions at the last minute. If you don’t have any cash reserves to deal with emergencies, you could end up making rushed and reactive decisions, rather than proactively dealing with the problem with a clear financial plan.

How to Create a Small Business Budget

Collect Your Business’ Financial Information

Before you get started with your small business budget, gather your business’ financial records, including numbers of past sales, expense reports, bank statements, previous tax returns and payroll information. This will give you a realistic place to start.

Figure Out Your Fixed Costs

Your business probably has a fair few costs, some of which will be fixed. These costs stay the same regardless of how many sales there are, such as rent or mortgage payments, loan repayments, employee salaries, business insurance and subscriptions.

Make a List of Your Variable Costs

You also need to factor in variable costs, which are costs that change depending on how busy your business is and how many sales you make. This includes the cost of stock, shipping, marketing, providing services, transaction fees, commissions and raw materials. When you sell more, or when you’re more active, these costs increase. You need to keep an eye on how these change over time.

Predict Your Business’ Revenue

Make a prediction about your business’ revenue based on realistic information. Factor in information about historic sales data, market conditions, seasonal trends and your plans for growth, and avoid making predictions that are too optimistic.

Create a Cash Flow Timeline

It’s a good idea to plan out when your business will bring in cash, usually in the form of paid invoices and sales, and when you’ll have to pay bills. This will give you a good idea of how much you’ll be spending and when. Timing is key, as budgeting means being able to have the funds ready to cover costs, at the time those costs need covering.

Don’t Forget Irregular Costs

Many business owners forget about irregular costs, which are often costly. These happen every so often – for example, paying tax at the end of the year – but to avoid sudden stress, it’s a good idea to include these in your budget and spread them throughout the year.

Build an Emergency Fund

It’s recommended that small businesses have an emergency fund to cover costs when sales slow. Start by aiming for 3 to 6 months’ worth of operating expenses, and build up your fund from there. If sales suddenly stop, the emergency fund is there to stop your business grinding to a halt.

Review Your Budget Monthly

It’s important that you look at the actual results of your budget, compare reality to the projections you made and make changes if they’re needed. Budgeting is something you do constantly, not just once.

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